INDUSTRY INSIGHTS

How to reduce IT costs now

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In a shrinking market, IT must reduce its price tag to stay relevant

Alan Morris, Retail Assist’s Managing Director, says retailers need to look again at IT cost models. As turnover falls, new cost management principles are required to reduce IT spend and contribute to a leaner business.

IT spend in retail is normally between 0.9 and 1.9 percent of turnover per annum, so taking 1.6 percent as an average would mean £1.6 million for a £100 million turnover business. The problem comes when sales drop and turnover falls. In a pre-credit crunch world, many retailers would have considered themselves well placed against a benchmark of ‘only’ 1.6 percent but now find their own costs reach or even significantly exceed that 1.6 percent figure. Given this scenario, wouldn’t it be ideal if your IT costs operated like a ‘tracker mortgage’ – the flexibility to have IT spend rise and fall relative to turnover, as business needs and the trading environment dictate? With that as an ideal, the first step is to take a good look at what you’re doing and where you’re spending, using the current downturn as an opportunity to change the way you run IT and so take costs out of the business.

Explore costs – look at new models

Today’s recessionary environment will be forcing retailers to question how they do things in relation to their IT and its cost, to carefully examine systems and processes. IT can no longer be seen in simple terms of how much value it adds to a business, important though that is, but also in terms of how much it’s actually costing you relative to your company size and level of business you’re actually doing, and considering which of your IT costs are truly fixed and areas where there may be some room for manoeuvre. Indeed, perhaps the best way to add value to a retail business right now is being able to maintain the status quo while controlling or even reducing key costs. This brings us to an old point but one still worth making: technology may be essential to running your business but it is not, in fact, your business. In view of that, here are five suggestions for a plan of action to help get things moving:

Find out what you are actually spending your money on.

Consider what’s changed since those spending decisions were made (falling turnover).

See which IT costs are truly fixed, sunk costs or variable (experience suggests IT is best seen as a ‘semi-variable cost’ with diverse elements ranging from hardware that depreciates year-on-year to internal help desks).

Think about the business needs or operational requirements driving those costs, and if they have changed.

Explore opportunities for change, and include your overall business strategy and objectives in your plans.

Let’s use a help desk as an example: actually a variable cost. A reduced retail estate following store closures or, say, or a reduction to six days in trading suddenly means your requirement for a fully resourced in-house help desk suddenly goes down. You can then explore moving to a new cost management model, which could mean changing how you run things in-house or looking to outsource some or all of that function, maybe using the economies of scale offered by a ‘shared services’ provider. The choice is yours but action will be required to drive lower costs. Of course, requirements can increase too. For example, in the face of falling high street sales you might want to focus on online sales driven by, say, special advertising promotions or customer incentives. Here, you could suddenly require more help desk resources and capacity than previously. With the future uncertain, you need to be ready.

New opportunities

Retailers should ask themselves ‘What am I spending my money on, and does that spending tie-in with our business objectives?’ If cost cutting is your main objective, you can pursue it only after you’ve properly understood where your costs lie. Even if cost cutting isn’t your primary focus it’s still a prudent exercise: you could be performing now but that can change. The basic point is retailers need to focus back on core cost management principles. Do you understand how much your IT costs, and how do those costs relate to what the business actually needs right now? How do you acquire and manage the products and services required to deliver your IT and could you drive those costs down and get better value from your supplier base? The fact is, exploring different cost models is a great opportunity to benefit from new services like SaaS (Software as a Service). This gives you instant access to the latest versions of software at a much lower cost than acquiring, integrating and maintaining it in-house. Buy what you need when you need it, with no overheads like software licenses or staffing.

For many retailers, and particularly their IT and Finance Directors, looking at costs in a far deeper way can be a revelatory experience. Only by gaining a true appreciation of what are fixed costs and what are variable can you reveal and plan for change: improving in-house practices, working with an outsourcer, or using a mix of internal and external resources can all mean you pay less. In a shrinking market, retailers have to make sure their operations in all areas are as lean as possible. To remain relevant and continue adding value, the priority in IT now is to reduce how much it costs, and to do that fast. If retailers don’t take action soon, their essential and increasingly expensive IT could end up being a millstone around their neck.